Goldman Sachs (NYSE:GS) has reiterated its Buy rating and $80.00 price target for GitLab Inc (NASDAQ: NASDAQ:GTLB), following the company's second-quarter earnings outperformance.
GitLab's revenue grew by 31%, surpassing the consensus estimate of 27%. The company's operating profit margin (OPM) reached 10%, exceeding the expected 6%, and both revenue guidance and OPM forecasts were raised for future quarters.
In after-hours trading, GitLab shares surged by 15%, signaling investor confidence as the company's recent performance has mitigated concerns about short-term execution risks and broader economic uncertainties.
Despite a year-to-date underperformance of 43% compared to the NASDAQ, Goldman Sachs believes the market has overly discounted GitLab's stock. The firm highlights GitLab's consistent growth rate of over 30% and its ability to leverage free cash flow margin (FCFM) as evidence of solid execution and attractive growth opportunities.
The analyst pointed to several factors supporting their positive outlook. GitLab's Ultimate tier is becoming a larger portion of the company's Annual Recurring Revenue (ARR), representing 47% compared to 46% and 42% in previous quarters.
The tier's popularity is evident as most of the largest deals and top first-order customers chose Ultimate. Moreover, GitLab's Duo tool has shown potential for cross-selling and has already delivered significant productivity improvements for customers.
Another sign of GitLab's stability is the lowest churn and contraction rates observed in eight quarters. Coupled with the highest customer-related performance obligations (cRPO) growth seen in five quarters, which stood at 42%, GitLab is poised for continued growth into the fiscal year 2026. The company's guidance suggests a high-20s growth rate by the fourth quarter.
Goldman Sachs also cited GitLab's increasing focus on product development, pricing strategies, and go-to-market initiatives as reasons for potential growth upside. As uncertainties related to elections and macroeconomic factors dissipate, GitLab's competitive position is expected to strengthen. The company's best-of-breed Generation-AI products and strategy to capture more of the market in a sector worth over $40 billion further support the firm's optimistic stance.
In other recent news, KeyBanc maintained an Overweight rating on GitLab, anticipating a modest revenue beat in the company's upcoming earnings report. Mizuho, TD Cowen, and BofA Securities, however, reduced their price targets for GitLab, citing various factors including potential competition and slower initial adoption of the company's latest offering, Duo Pro (AI). Despite the adjustments, all firms maintained positive ratings on the company's stock.
In the midst of these financial updates, GitLab announced an executive change with Ashley Kramer appointed as the Interim Chief Revenue Officer following the resignation of Christopher Weber. Additionally, rumors have circulated about GitLab engaging in potential acquisition talks, with Datadog (NASDAQ:DDOG) Inc. identified as a possible buyer.
InvestingPro Insights
Following Goldman Sachs' reaffirmation of a Buy rating for GitLab Inc (NASDAQ:GTLB), InvestingPro data and tips provide additional insights into the company's financial health and market performance. GitLab holds a strong cash position relative to its debt, which is a positive indicator of financial stability. This is supported by the fact that the company's liquid assets exceed its short-term obligations, providing a buffer for operational flexibility.
InvestingPro data highlights GitLab's impressive gross profit margin of approximately 89.63% for the last twelve months as of Q1 2023, which underscores the company's ability to maintain profitability on its core products and services. However, it is important to note that the company has not been profitable over the last twelve months, with a negative P/E ratio of -16.13 and an operating income margin of around -28.96%. Despite this, analysts have revised their earnings upwards for the upcoming period, suggesting optimism for GitLab's future profitability.
The company's stock has experienced significant volatility, with a 40% decline over the last six months, yet it is currently trading at a high Price / Book multiple of 12.5. While the market has discounted GitLab's shares, the recent surge in after-hours trading reflects growing investor confidence. For those considering investment in GitLab, the InvestingPro platform offers additional tips, including the prediction that the company will be profitable this year and the absence of dividend payments to shareholders, which could be relevant for investment strategies.
Investors seeking more in-depth analysis can find a total of 21 additional InvestingPro tips for GitLab at InvestingPro, which may further inform investment decisions and provide a broader picture of the company's potential.
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